Mark receives an order for Euro 25 million worth of machinery from one of his clients in Singapore. The specific equipment is manufactured and exported from Germany. Mark has mostly imported machines from China, Korea and Japan, and occasionally from Austria but never Germany.

He inquires and identifies a German exporter Gunther -- who is willing to do business with Mark. Gunther can supply the machines in 120 days and expects payment on delivery in Euro.

1) What are the risks Mark faces in entering this deal with Gunther? Give calculations and details.

2) How can Mark mitigate the SGD / Euro exchange rate risk? Explain what he should do? Will he make a profit or loss on the exchange conversion?

Clearly show your calculations by using the following information:

Assume the spot rate S1 today is SGD 1.45 = 1 Euro and the forward rate today for payment

120 days down the road F120 is SGD 1.46 = 1 Euro. There are anticipations that the SGD will

depreciate by 2 % against the Euro in the next 120 days.